All Power to the Fed?

Ben Bernanke thinks it’s important for the Fed to hold onto its bank regulation and consumer protection functions. “Because of our role in making monetary policy,” he said in an op-ed this weekend, “the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.”

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed’s role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don’t think they will be able to do so.

An easily verifiable test! I hope somebody does this. Like Reinhart, I don’t think they’ll find any linkage either. A separate bank regulator might or might not do any better than the Fed, but the Fed certainly doesn’t bring any magic to the job. (Via Real Time Economics.)

And in other Fed news, Bernanke’s testimony today during his confirmation hearing didn’t do much inspire confidence in his policy judgment either. Bernanke, it turns out, is opposed to just about everything except cutting middle class entitlements. Dave Dayen summarizes:

So let’s tally that up. No second stimulus, no jobs bill, no public investment to deal with the worst hiring crisis since the Depression, no relief for a jobless recovery, but yes to cutting people’s meager Social Security benefit and their health care in their old age.

That’s the economic consensus among the Washington elite, so it’s hardly surprising that Bernanke agrees with it. It’s also why I wish Obama had had the guts to nominate someone else.